How did we get here?

In 2013, the Organisation for Economic Co-operation and Development (OECD) and G20 countries adopted a 15-point action plan to address tax base erosion and profit shifting (BEPS) around the world. This project created a single set of consensus-based international tax rules to protect tax bases while offering increased certainty and predictability to taxpayers. In 2016, the OECD and G20 established an Inclusive Framework (IF) on BEPS to allow interested countries and jurisdictions to work with OECD and G20 members to develop standards on BEPS-related issues. Barbados joined the IF in 2017 as the 101^st member and currently over 140 countries are part of the framework.

Since joining the IF, Barbados has implemented numerous tax changes, including repealing the International Business Companies regime, implementing economic substance requirements, establishing country-by-country reporting rules and more. In 2024 a series of tax measures became law, including both domestic tax reform and so-called “top up tax” (Pillar Two).

And there is more to come:  

• the 2023 Budget announced that transfer pricing legislation would be modeled on the OECD guidelines, which provide for the consistent application of the arm’s length principle. We anticipate this will be passed into law very shortly and become effective for 2025.  
• the 2024 Budget announced that the double taxation agreements Barbados currently has in place will be modernized and new treaties will be negotiated with other global trading nations to make the country even more attractive to foreign investors. This effort is already underway.
• the 2024 Budget also noted that the economic substance rules would be amended to reduce some of the current reporting obligations that are no longer considered necessary as a result of modernizing the tax system. We expect these changes to be effective in 2025.

The government has also been focused on ensuring Barbados is no longer viewed as “non-cooperative” by bodies such as the European Union and the OECD. Implementing robust rules around anti-money laundering, exchange of information with other nations and other actions have resulted in the country no longer being “blacklisted”. It is the objective of the government to ensure this remains the case.

These current and proposed changes demonstrate the “maturing” of Barbados as a developing nation and provide a necessary level of certainty and transparency for both current and potential investors. Combined with the other attributes that make Barbados an attractive location in which to do business, these should ensure the continued growth of the country. Key factors which contribute to this include solid economic fundamentals, a well-educated workforce, stable political leadership, reliable communications and an accessible network of air links to major cities in North America and Europe.

Tax Reform in Barbados – what does it mean?

Domestic tax reform

The most important change to the Income Tax Act^[1], effective for 2024 is the new 9% corporate tax rate. This replaces the previous sliding scale, which ranged from 5.5% on taxable income up to BDS $1 million, dropping to 1% on taxable income over BDS $30 million.

Some exceptions apply to the flat 9% tax rate:‍

• ‍Small businesses – a company with gross revenue of BBS $2 million or below will now be subject to a tax rate of 5.5%.  This is consistent with many other countries to help facilitate the growth of the small and medium enterprise sector.‍
• Insurance companies – the corporation tax rate applicable to insurance business will continue at 0% for class 1 insurance business and 2% for class 2 insurance and class 3 business. This is an important component of the financial services sector in Barbados, although the largest companies in this sector will be subject to top-up tax.‍
• International shipping – this sector will continue to be taxed based on the current sliding scale tax rates. This exception is consistent with the OECD carve-out for such companies and will assist this element of the local economy.‍
• Companies with an intermediate or ultimate parent entity in a country not implementing the global minimum tax in 2024. These companies continued to benefit from the previous sliding scale for 2024 only.  

The amendments to the Income Tax Act contain two additional measures also effective for 2024: a so-called “patent box” regime, and the re-introduction of “group relief” for the surrender of losses between corporations in Barbados.

The patent box rules result in the income earned from qualifying intellectual property being taxed at one-half the new domestic corporation tax rate, i.e., at 4.5%. This will be attractive for smaller companies, although for entities subject to global minimum tax in Barbados, their overall tax rate will be “topped up” to 15%.

The group relief provisions allow the trading losses of a “surrendering company” to be set off against the profits of a “claimant company”, subject to satisfying several technical requirements. Barbados previously had group legislation, so re-establishing this feature of the tax system is welcomed by many.

Global Minimum Tax

Under Pillar Two^[2], in-scope multinational enterprises (MNEs) are those with annual revenue over EUR 750 million and their Barbados entities will be subject to the global minimum tax rate of 15% i.e., effectively “topped-up” from the domestic tax rate of 9%.

The top-up tax is generally effective for taxation years commencing on or after January 1, 2024. However, for 2024 only the top-up tax effectively does not apply where the group is not subject to Pillar Two in its headquarters country.

The legislation provides a detailed set of rules based on the OECD guidelines, generally applying International Financial Reporting Standards (IFRS) accounting standards and enabling the consolidation of income and losses for constituent entities based in Barbados.

Qualifying refundable tax credits are available to eligible corporations, including a jobs credit (up to 100% of eligible payroll expenditures depending on the number of employees); and a research and development (“R&D”) credit of 50% of eligible expenditures on qualifying R&D activities.

So, what does all this mean for companies operating in Barbados?

The overall tax burden of MNEs operating in Barbados is expected to increase, however many companies that are subject to global minimum tax at the parent level in another country have taken the positive attitude that because top-up tax has to be paid somewhere in any case, it might as well be paid to Barbados.  This is consistent with the goals of BEPS to more evenly distribute global taxes.  

The cash flow of many companies will also be impacted by the changes both due to the higher domestic tax rates in many cases but also arising from the imposition of new rules requiring monthly prepayments of corporate income tax.  

Barbados has somewhat softened the blow of the higher domestic and top-up tax rates, not only by implementing the qualified jobs credit and R&D tax credit noted above, but also by proposing additional credits in the 2024 Budget. These are summarized below and reflect the broader policy direction of the government to attract greater domestic and foreign investment in a number of sectors considered either high-growth or important to address issues such as climate change.

With the implementation of this new corporate tax regime, Barbados should be viewed as a country which has recognized that to remain globally competitive it must adapt to the new world order for tax certainty and transparency. Barbados continues to be a global destination of choice, not only for its attractive lifestyle, but by ensuring that its policy and legislative frameworks are at the leading edge. While there is more to come, Barbados remains “open for business”.

^[1] Income Tax (Amendment) Act, 2024

^[2] Corporation Top-up Tax Act, 2024

‍